Country Report 2016

Romania

Servaas Deroose
Deputy Director-General
EC, DG Economic and Financial Affairs

Bucharest, 9 March 2016

European Semester
 2016 In-depth review

External sector and competitiveness

Net international investment position
Current account balance
Cost and non-cost competitiveness

Financial sector
Banking sector
Insurance sector

Medium-term risks
Demand side policies
Supply side policies

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 Scene setter

Economic growth has been strong over the last three

years, gradually broadening its base
The output gap is projected to close and turn positive
in 2016
The current account balance has improved substantially
The large negative net international investment
position (NIIP) has been improving since 2012 and is
expected to sustain this trend in the coming years
Going forward, risks of less sustainable growth are
emerging

3
 External sector and
competitiveness

Current account

The current account deficit has Current account balance by

components
decreased significantly in recent
years 5

The adjustment has been due 0

to non-cyclical factors, including

the structural improvement in -5

the trade balance

Current account deficit forecast
-10

to widen, but to remain -15

contained until 2017, due to a Net primary income Net current transfers

boost to domestic demand -20

Trade balance Current account balance

leaking out through imports 08 09 10 11 12 13 14 15* 16* 17*

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 External sector and
competitiveness

External sustainability
Net international investment
Relatively large negative net position financing
international investment 40
% GDP

position (NIIP) 20

Not unusual for a catching-up 0

economy -20

-40
Improving since 2012 and set
to sustain this trend
-60

-80

High share of volatile sources of -100

financing 01 03 05 07 09 11 13 15Q3

Changes in reserves (net)

Sensitive to macroeconomic Other investment (net)
shocks Net direct investment

Net external debt (neg. sign)

Net int'l investment position (NIIP)

5
 External sector and
competitiveness

Cost competitiveness
Real effective exchange rate
One of the highest growth rates (ULC based)
in export market shares in the EU 115 index,
between 2010 and 2014 2010=100

110
Export performance fuelled by
improvements in cost 105

competitiveness 100

Real effective exchange rate had 95

negative or low positive growth

90

Until recently the expansion in 85

export market share has been
associated with contained unit 80

labour costs 75

Cut in social security contribution 70

in 2014 helped contain unit 05 06 07 08 09 10 11 12 13 14

labour costs

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 External sector and
competitiveness

Non-cost competitiveness
Share of high-tech products in exports
Romania competes mostly on in Romania and peer countries
price rather than quality
25 Romania Bulgaria
% of total
R&D and innovation
Czech Republic Hungary
export Poland Croatia
expenditure is low and
inefficient 20

Underdeveloped transport
infrastructure 15

Unstable regulatory framework

10
Access to credit for SMEs is
difficult
5

0
07 08 09 10 11 12 13 14

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 Financial
Sector

Banking sector
In 2015 cleaning up of banks' balance Non-performing loans
sheets continued 35

banks profitability recovered 30

AQR and stress test are being 25

launched by the NBR 20

However, risks have increased due to 15

domestic sources of vulnerabilities:
10
o Draft law on debt discharge with risks to
financial sector stability and to economic 5

growth
0
o Court decisions on unfair contract terms Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14
Non-performing loans to total loans (NPL)
Sep 15

in loan contracts may put significant o/w non-financial companies NPL

o/w household NPL
pressure on banks' capital buffers o/w household NPL consumer loans
o/w household NPL for house purchase

8
 Financial
Sector

Insurance sector

In 2015, a comprehensive balance sheet review (BSR)

and stress test was successfully completed, the first such
exercise in an EU Member State
The BSR revealed several deficiencies, which required
corrective measures and included putting into insolvency
one company
The BSR also showed that:
o Several insurance undertakings did not comply with
the Solvency I requirements and
o Most insurance undertakings need further efforts to
prepare for Solvency II

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 Medium-term risks
of imbalances

Demand side policies

Romania achieved fiscal Fiscal deficit, structural balance
adjustment in past few years and MTO
but fiscal deficit as a percent of 11 12 13 14 15 16 17

GDP is expected to more than

0
-1.1
triple in only two years -0.7
-1 -1.0
-1.4
Lack of strategic planning, and -1.2

weak implementation of the fiscal -2 -2.1

-2.2
rules are key drivers of pro- -3.0
cyclicality -3 -3.0 -3.2
-3.0

Tax cuts and public wage increases -3.8

will contribute to deficit in 2016-17 -4 -4.0

forecast
Pro-cyclical fiscal policy in a
-5
strong-growth environment could -5.4
Actual balance (nominal deficit)
trigger internal and external Structural balance
MTO
imbalances in the absence of
-6

supply-side measures
10
 Medium-term risks
of imbalances

Supply side policies

Lack of medium- to long-term Quality of public infrastructure index,
strategic planning on infrastructure Romania and regional peers
development 7

Constrained capacity to absorb EU 6

structural funds
Insufficient or low-quality
5

infrastructure reduces accessibility 4

and may limit investment
Low and inefficient R&D and
3

innovation expenditure 2

Government regulation and legal

uncertainty continue to weigh on
1
CZ HU PL HR BG RO
competitiveness Infrastructure
Transport infrastructure
The effectiveness and efficiency of Electricity and telephony infrastructure

public administration remain limited Scale: 1-7 (best)

Source: World Economic Forum, The Global
Competitiveness Report 2015-2016

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 Medium-term risks
of imbalances

Barriers to investment

Ineffective public administration

Red tape

Legal uncertainty due to frequent changes of tax and

other business-related legislation

Predictability and enforcement of judicial decisions

Corruption

Inefficient and insufficient investment in infrastructure

Limited access to financing for SMEs

12
 Medium-term risks
of imbalances

Barriers to investment

13
 CONCLUSION

Romania has reduced internal and external imbalances

However
vulnerabilities for the Romanian economy may re-emerge:
o legislative initiatives with potential impact on the banking
sector
o pro-cyclical fiscal policy
accelerating wage growth
no counterbalancing supply-side measures.
Sustainable growth would require boosting investment and
increasing the pace of structural reforms

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 THANK YOU
V Mulumesc

Link to the 2016 country report:

http://ec.europa.eu/europe2020/pdf/csr2016/cr2016_rom
ania_en.pdf

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